China is building a number of new cities and numerous districts each year, with many of the new developments completely empty. It must be one of the most ludicrous bubbles ever. It such an artificial economy, built on staggering and unreliable debt, that is going to give China shock of its existence in the next 10 years. I cannot see China being able to prevent it.
from AMBROSE EVANS-PRITCHARD
Tough times ahead.
The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses as in past episodes, implying tougher times ahead.
“The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation,” said Charlene Chu, the agency’s senior director in Beijing.
“There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling,” she told The Daily Telegraph.
While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. “It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property,” she said.
Concerns are rising after a string of upsets in Quingdao, Ordos, Jilin and elsewhere, in so-called trust products, a $1.4 trillion (£0.9 trillion) segment of the shadow banking system.
“There is no way they can grow out of their asset problems as they did in the past. We think this will be very different from the banking crisis in the late 1990s. With credit at 200pc of GDP, the numerator is growing twice as fast as the denominator. You can’t grow out of that.”
The troublesome credit-GDP growth gap.
Chinese credit growth has outpaced GDP growth for some time.
Some have argued that this is the main bear argument on China right now.
Many are asking why this is the case? Where all the money’s gone? And is China facing it’s own Minsky moment — a phenomenon that refers to periods of speculation that lead to crisis and that was named after economist Hyman Minsky who wrote about the inherent instability of bull markets.
In a new note, Bank of America’s Ting Lu writes that this has raised questions about whether the non-performing loan ratios are higher than expected, if there are more artificially propped up investment projects that are using new credit for interest payments, is there more speculation than people realize
“Property speculation and a rising number of zombie companies,” partly explain the credit-GDP growth gap he write. “More careful study tells us that the gap is smaller than what had been believed due to double counting and other distortions, and a majority of the gap could be ascribed to reasonable changes in fundamentals and short-term factors which should not be extrapolated.”
Exiting foreign money risks credit crunch
The violent swings in the yen and Nikkei Averge in recent weeks threaten to spell the end of the Abenomics trade.
As this leads to an unwinding of the yen carry trade, China’s highly leveraged economy could be exposed as this source of “hot money” funding dries up.
China is already showing fresh signs of financial stress. After a steep spike in interbank rates last Friday came a failure of a government-bond auction as cash becomes increasingly tight. There has also been a weakening in the yuan, as authorities allowed the tightly controlled currency to slip 0.3%.
There is wider market dislocation in Asia, with investors pricing in an end to cheap money as the U.S. Federal Reserve signals a step back from quantitative easing and considers “tapering” its asset purchases.
Things are changing.
From Societe Generale’s new quarterly Global Economic Outlook report:
End of China growth dominance: China has long been the dominant driver of Asia growth, but this is no longer the case as the economy undergoes a structural slowdown. Japan has engaged policy stimulus and US recovery marks an additional positive for global growth. The PBoC has resisted the temptation to ease and, looking ahead, we expect to see tighter credit conditions in China act as an additional brake on economic activity. The Fed’s QE exit may amplify the situation, drawing out capital and placing downward pressure on the yuan. Structural reform will ultimately determine how painful the adjustment will be – the right reform efforts have the potential to smooth the adjustment.
Below are two charts from SocGen that show how important China is to the rest of the world. First is SocGen’s estimate for the impacts of a major economic slowdown in China:
Foreign demand for U.S. Treasury securities fell in April for the first time in more than a year, as China and Japan both trimmed their holdings.
Selling was heavily concentrated in Treasury bonds and notes, with overseas investors unloading $54.5 billion, the first net outflow in seven months. Private investors alone sold $30.8 billion – the largest one-month outflow on record.
Overall, foreigners sold $37.3 billion in long-term U.S. securities, the largest outflow in at least three years. March’s outflow was revised slightly to $13.4 billion.
“Demand for U.S. securities was much weaker in April,” said Gennadiy Goldberg, U.S. strategist at TD Securities. He said the scope of Treasury sales was “somewhat surprising given the fresh bout of European uncertainty observed in the month,” referring to a European Union rescue of Cypriot banks.
The next major risk for investors is China’s “colossal credit bubble,” Marc Faber, editor and publisher of The Gloom, Boom & Doom Report told CNBC.
There has been a huge credit bubble in China, and it isn’t going to end well. Its economy officially grew 7.7% in the first quarter. In reality, it is growing 4% a year, at best. Figures on Chinese exports to Taiwan, South Korea, Hong Kong, and Singapore don’t agree with the import figures of those countries. In each case, reported exports are much larger than reported imports.
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